United States

Feds' bait-and-switch move gets mixed reviews

Upside: Increased state-based incentive programs
Downside: Flawed federal legislation; underdeveloped production infrastructure in many of the states with incentive programs
State Film Offices:
New Jersey:
New Mexico:
New York:

Finally, after years of complaints about foreign governments wooing away productions with tax incentives and cheap labor, the U.S. government decided to do something about it. By most accounts, it failed.

In October, the Bush administration and Congress passed the American Jobs Creation Act, which includes a film and TV provision that would grant investors a 100% writeoff — in the year the costs are incurred — for any production with a budget of $15 million or less.

Most important, the act as drafted permitted gains on sales on the film held for more than one year to be treated as capital gains — which are taxed at 15% — rather than ordinary income, which is taxed at 35%.

Initially, the bill was hailed as a major victory for the independent sector, but that enthusiasm was short-lived. In January, the Joint Committee on Taxation announced that the capital-gains clause was unintended and would most likely be revoked, and that budgets would include participation and residual deals, thus making fewer projects eligible for the $15 million condition.

“We were really excited about (the act) when it was passed, but it’s become clear that it just doesn’t work,” says Tim Williams, of New York production outfit GreeneStreet Films. “I don’t think it’ll make a damn bit of difference to our investors.”

Schuyler Moore, a partner at corporate law firm Stroock & Stroock and the author of the treatise “Taxation of the Entertainment Industry,” agrees. “Let’s put it this way,” says Moore, “not a single film is being shot in the states because of the act, and no film will ever be shot here because of it. And that’s a promise.”

Others, however, are not quite as dismissive.

“We might not get all the presents under the tree, but there’s enough there to get some excellent business started,” says Steven Beer, partner at entertainment law firm Greenberg Traurig. “You still have the ability to write off the production expenses within the first year against passive income. There’s enough meat on the bone to make this a satisfactory meal.”

But Moore argues that film companies need financing, not tax deductions, and that the deductions can’t be used to raise financing because if the deduction is transferred to investors, the film company gets hit with tax on 100% of the gross income from the film.

In the meantime, legislation at the state level has been met with a considerably warmer reception, and tangible results.

Louisiana, whose incentive program has been in effect since 2002, continues to lead the way. The package, which combines a 10%-15% investor tax credit, labor tax credit and a sales tax exemption, brought $300 million in production money to the state in 2004.

Productions already completed in Louisiana this year include “All the King’s Men,” “The Dukes of Hazzard,” “Lady Luck,” “Locusts,” “Faith of my Fathers” and “Retirement.”

Recently, the climate has become much more competitive, with more than 10 states now offering significant programs combining exemptions, credits and outright rebates.

The most significant new player is New York state, which passed a bill in August offering a 10% tax rebate to all production expenses incurred in state, providing a production shoot at an approved stage. (New York City kicked in an additional 5% in January.)

Other states offering major incentives include Florida, Hawaii, Illinois, Mississippi, Missouri, New Jersey, New Mexico, Pennsylvania, and Utah. Plus, California Gov. Arnold Schwarzenegger has been waging a very public campaign to pass an incentive bill. “Every day, it seems like the situation is changing, with the states trying to leapfrog over each to get more business,” says Greenberg Traurig partner Randy Paul. “But it’s not all that simple. Some states have the crews for a lot of productions, and some states don’t. And how quickly does the money come back, and in what form? It has significantly picked up here, but compared to some of the other countries, in terms of incentives the U.S. is lagging behind.”